US stock markets plunged after the latest inflation report spooked investors, triggering shock waves in European and Asian markets on Wednesday. The Wall Street outlook turned even more dismal with brokerage firm Nomura saying the Federal Reserve could hike rates by a full percentage point a week later.
The Dow Jones Industrial Average slid lost 1,276 points, or a whopping 3.94 percent, to close at 31,104. The S&P 500 plunged 4.32 percent to 3,932 and the Nasdaq Composite tanked 5.16 percent to end at 11,633 as the dismal inflation report was worse than expected.
The stock rout was the worst single day drop since June 2020 and it negated the gains from all recent rallies.
“We continue to believe markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” Nomura said in a note to clients, according to Market Watch.
The brokerage said the federal fund rates could be jacked up to the range of 3.25 percent to 3.5 percent when the FOMC meets on September 20-21. Nomura believes the US Federal Reserve will ultimately end up raising the rates to the 4.75 percent level by 2023.
The central bank funds rate is in the 2.25 percent to 2.5 percent range currently. The report says that it was in the early 1980s that the Fed went for such a drastic rate hike the last time.
Morgan Stanley warned last week that the stock market sell-off, triggered by recession fears and the inflation specter, has not ended yet. The brokerage said that the US stock index S&P 500 could drop up to 25 percent in the next four months.
Even this level is not a guaranteed bottom for the market. If the US economy slips into a recession, the index could plunge to 3,000, the analysts warn.
“While acknowledging the poor performance in equities year-to-date, we do not think the bear market is over if our earnings forecasts are correct,” they wrote, Yahoo Finance reported.
In the first six months of the year, the S&P 500 stock market index lost 20.6 percent, which was the steepest half-yearly loss for the US stocks since 1970. The index also breached the bear market territory, having lost more than 21 percent from the January high.
Analysts worry that hiking the interest rates will result in a money squeeze that will eventually push the US into recession, thereby affecting corporate profits. A conservative estimate is that the S&P 500 can potentially drop another 20 percent if the country slips into recession.